Individual Savings Accounts, or ISAs, are savings and investment products offered by banks and other financial institutions in the UK that allow savers to take advantage of tax-free earnings, regulated by Her Majesty's Revenue and Customs service, or HMRC. Two types of ISA products are available to savers, the stocks and shares ISA, and the cash ISA. Stocks and shares ISAs consist of investments in shares while cash ISAs consist of bank savings accounts.
A cash ISA can consist of several types of cash-based savings products. Most people holding cash ISAs will use cash deposited in a bank or building society as their cash ISA savings product, but there are provisions for other cash-based investments to be included in a cash ISA, such as savings products that comply with Shari'a, favoured by Muslims, who are not allowed to earn interest on money for religious reasons. Some National Savings products, which are forms of government borrowing, are designed specifically for inclusion in cash ISAs, but standard National Savings products, such as Pensioners' Guaranteed Income Bonds or National Savings Certificates, cannot be included in a cash ISA. If you are saving for a pension using the "stakeholder cash product," then this can be included in a cash ISA.
Cash ISA Investment Limit
In 2010, the amount of money that a person can invest in ISAs is limited to £10,200 annually. However, the entire amount cannot be invested in a cash ISA as it can with a stocks and shares ISA. Only £5,100 can be invested in a cash ISA each year, and you can only invest in one cash ISA product per year. This means that you cannot split your investment in a cash ISA between several bank or building society accounts, and include all of those accounts in a single cash ISA in any one year. If you reach the tax-free limit that you are allowed to invest in a cash ISA, you can invest the remaining £5,100 in a stocks and shares ISA, allowing you to take advantage of the full ISA investment limit for the year. Interest earned on money invested in cash ISAs is not subject to income tax, and money can be withdrawn from a cash ISA account at any time, without penalty.
Transferring an ISA
Cash that was invested in a cash ISA in previous years can be transferred to another cash ISA or a stocks and shares ISA. You might want to do this to take advantage of the full tax-free investment limit in a year where you do not have the funds available to invest that amount. You do not have to transfer the full amount of your previous cash ISA; instead, you can choose to transfer only the amount that you want to transfer. You can also transfer cash that you have paid into a cash ISA product in the current financial year, but for current year transfers, the full amount that has been paid into the current cash ISA must be transferred to the new cash, or stocks and shares, ISA.
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